The Covid-19 pandemic profoundly disrupted global trade in 2020. However, it has also caused new paradigms to emerge, some of which point to potentially positive outcomes over the medium term.
From national lockdowns to closed airspace and borders, Covid-19 resulted in unprecedented disruption to the mechanics of most economies, regardless of their size or stage of development. In particular, the creation of such barriers placed a major strain on global supply chains.
This was felt most keenly in the case of essential linkages related to food and medicine, and the global distribution of such products became a key focus of efforts to respond to the early stages of the pandemic.
In the first months of the year, China – the world’s largest producer of active pharmaceutical ingredients – severely curtailed industrial production to limit the spread of Covid-19, causing a shock along the entire chain. Although India is a global leader in the production of generics, 70 per cent of its raw materials come from China. Of these, one-third come from Hubei, where the outbreak originated.
Response to the disruption varied by country: some repurposed civilian aircraft to bring in pharmaceutical supplies, while others turned to technology to minimise the impact.
Short-term fixes aside, the virus could potentially result in a significant realignment of supply chains away from China and India, and lead to long-term benefits for local industries in other emerging markets – particularly those with large internal markets relative to others in their region, such as Egypt, Indonesia, Saudi Arabia and Mexico.
“Saudi Arabia is looking to foster localisation and encourage local production, and continue sourcing products from various countries to reduce the impact of any disruptions,” Ayman Tamer, chairman and managing partner of Gulf-focused health care company Tamer Group, told OBG in April.
The global network of supply chains for foodstuffs was also significantly impacted by the pandemic. As with pharmaceuticals, a combination of complex value chains and production processes made supply chain management challenging.
Recognising the potentially serious impact of the breakdown of such networks, in April the UN Food and Agriculture Organisation, the International Fund for Agricultural Development, the World Bank and the UN World Food Programme issued a joint statement on the impact of Covid-19 on food security and nutrition.
“Agriculture and its food-related logistic services should be considered as essential. Increased efforts are needed to ensure that food value chains function well and promote the production and availability of diversified, safe and nutritious food for all.”
Many governments acted to facilitate the movement of food. For example, in mid-April members of the GCC, including Qatar, agreed to establish a food supply network to safeguard the region.
China +1 and nearshoring
Even before the onset of Covid-19, rising Chinese labour costs and increased tariffs related to the US-China trade war were leading some companies to move industrial operations into third countries, while maintaining production bases in the country – a strategy referred to as China +1.
The pandemic has served to accelerate this trend, with the EU, Japan and the US all making public statements about the prospective relocation of companies with China-based factories.
Many international firms began looking to diversify their supply chains to reduce future exposure risk by shifting to countries in the Association of South-east Asian Nations (ASEAN) like Vietnam, Thailand and Malaysia.
Others began to bring their production capacity closer to home, a trend known as nearshoring.
As well as increasing resilience to supply chain disruptions, nearshoring offers a range of potential advantages over traditional offshoring, including fewer cultural, linguistic and time-zone differences, greater regulatory alignment and lower risk to intellectual property.
Thanks to its proximity to the US, Latin America has seen some benefits from this trend, with two countries in the region standing out as affordable nearshoring options: Mexico and Colombia.
Mexico in particular has several characteristics that make it an advantageous nearshoring location, including a wide range of cities, a developed labour pool and a shared border with the US. The signing of the US-Mexico-Canada Agreement (USCMA) in July further cemented this potential.
Asian countries are likewise well placed to benefit. Prior to the pandemic, Vietnam had already absorbed much of the manufacturing capacity that China had lost. The country has signed a raft of international trade deals and invested significantly in industrial infrastructure in recent years.
In Indonesia, meanwhile, the Omnibus Bill on Job Creation became law in October. One of the many effects of this legislation will be to increase corporate flexibility in hiring practices, as well as to open the door to labour-intensive industry. This stands the country in good stead to attract regional and global multinationals seeking to apply a China +1 strategy.
On a similar note, existing manufacturing hubs in Morocco, Tunisia and Egypt could be viewed as competitive destinations for European industrial firms seeking to nearshore their production bases.
With well-established trade links to European markets, Morocco is a particularly attractive proposition. The country has been recognised internationally for its response to the pandemic, which has seen Morocco leverage its industrial capacity to produce high-demand medical supplies.
Regional trade deals
In addition to the increase in nearshoring, 2020 saw significant activity on regional trade deals.
On July 1 the USMCA replaced the North American Free Trade Agreement as the framework governing trade between the US, Mexico and Canada.
In addition to strengthening environmental and working regulations and incentivising domestic vehicle production, the agreement updated intellectual property protections in a move that the authorities hope will spur research and development in industry. For Mexico, in particular, the new intellectual property laws could potentially boost the long-term prospects of its industrial and pharmaceutical sectors.
In Africa, meanwhile, Covid-19 has sped up the adoption of various measures associated with the African Continental Free Trade Area (AfCFTA).
Initially agreed in March 2018 and subsequently signed by 54 of the 55 member countries of the African Union, the deal aims to create a single market across Africa.
The AfCFTA requires members to remove 90 per cent of tariffs on goods, facilitate the movement of capital and people, and take steps to create an Africa-wide Customs union, which could significantly boost regional trade. When fully operational by 2030, the AfCFTA is expected to cover a market of 1.2bn people with a combined GDP of US$2.5 trillion.
In late September Wamkele Mene, the secretary-general of the AfCFTA Secretariat, told a business conference in South Africa that AfCFTA negotiations over e-commerce and digital trade would be fast-tracked, with Covid-19 heightening the need for an adequate legal and governance framework.
These talks – initially planned for phase three of the trade zone – will now take place in early 2021 as part of phase two, alongside competition policy, intellectual property rights and investment protocols.
The focus on digital trade will include efforts to speed up Customs clearance procedures between countries. International media also reported that the 54 AfCFTA signatories were moving forward with talks on the taxation of e-commerce platforms, which have seen substantial growth during the pandemic.
Elsewhere, in Asia the Regional Comprehensive Economic Partnership (RCEP) was finally signed in November, on the sidelines of the annual Asean summit.
As well as marking a significant regional milestone, it is hoped that this deal will help its 15 signatories recover from the economic fallout of the pandemic by boosting regional trade linkages, making it easier to establish a production base in an Asean member state and export to the other 14 members of the bloc.
The deal’s signatories – namely the 10 Asean members plus China, Australia, Japan, New Zealand and South Korea – together constitute 30 per cent of the world’s population and just under 30 per cent of its GDP.
The 510-page agreement should provide a substantial fillip to regional trade, lowering tariffs, standardising Customs procedures and improving regulatory harmony among its members. Its 20 chapters cover topics from digital procedures to financial services and intellectual property rules.
“We acknowledge that the RCEP agreement is critical for our region’s response to the Covid-19 pandemic and will play an important role in building the region’s resilience through an inclusive and sustainable post-pandemic economic recovery process,” the Joint Leaders’ Statement released on the occasion of the signing noted.
While it had been under negotiation for some years, it is widely thought that Covid-19 accelerated the process of RCEP’s signing and convinced waverers of the benefits associated with greater regional integration.
In short, the pandemic has underlined how multilateralism and regionalisation can help to mitigate global shocks. By developing more efficient and agile supply chains with their neighbours, countries have reduced the risk of over-reliance on trade with the world’s largest industrialised economies.
Going forwards, Covid-19 will invigorate efforts to boost supply chain resiliency, enhance the diversity of trade relations and foster wider cooperation between trading partners.
This opinion piece was produced by the Oxford Business Group.